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Tony Horrell, CEO of Jones Lang LaSalle’s International Capital Group, commented: “There is currently a large overhang of investment targeting the sector with $5 of money chasing every $1 of product. Global real estate markets performed very strongly throughout 2006; it was the first year that all major developed and emerging market returns were both aligned and positive. Investment was driven by increased allocations to the asset class, growth in investible stock and by the increased attention of opportunistic private equity players who identified relative value in the sector.  These increased flows into real estate gave rise to two notable phenomena in 2006 – an increasing number of ‘mega-deals’, and continued globalisation of the asset class.”

The largest increase in investment came from global co-mingled funds, which are now involved in transactions representing 17% of direct real estate investment globally.  Global funds acquired US$83bn (up 240%, principally in Germany, US, UK, Japan) and sold US$39bn (up 32%). 

Global funds’ purchase activity was equivalent to the entire 2006 real estate transaction volume in Japan and France combined, or almost 90% of total Asia Pacific volume.  Global funds dominated the German market, purchasing 40 percent (by value) of all German commercial property traded.  Other significant cross border investors included US investors ($18bn, up 51%, principally invested in the UK, France and Germany), UK investors ($18bn, up 200%, principally Germany), Middle Eastern investors ($13bn, up 14%, principally the US, UK, Germany and South Africa) and Australian investors ($12bn, principally Germany and the UK).  Horrell added: “Germany’s relative attractiveness has increased significantly due to a unique combination of willing domestic sellers, underweight cross-border investors, positive yield spreads and a recovering economy.  Japan offers investors exposure to a recovering economy and yield spreads of almost 200bps”.

Padraig Brown, Global Strategy and Research Director, Jones Lang LaSalle, went on to say: “A significant driver of transaction growth has been an increase in corporate real estate disposals.  Corporate occupiers sold over $55bn of real estate assets during 2006 with the large corporate disposals occurring in Japan ($14bn) and Germany ($12bn) and other significant sales recorded in the US, the UK, Singapore, Finland and France.  Whereas fewer than 25% of US corporates own their real estate, the majority of continental European and Asian companies retain significant real estate assets on their balance sheets.  The trend towards sale and leasebacks will continue to drive improved real estate liquidity and investor interest in these markets.

“Emerging market growth was also strong.  Brown continued “Emerging markets had a strong year with over $40bn of transactions recorded (up 74%).  Many of these markets have appeared on investor’s radars only recently and are exhibiting exhilarating rates of growth, with the Russian market expanding by over 700% during 2006 and strong deal flow in China, Turkey, Mexico and Brazil.

“Real estate fundamentals remain strong, with solid economic growth projected, vacancy rates remaining low in most major markets, and development pipelines remaining modest.  Rental growth should help support recent yield compression, however investors should note that the pricing differential between prime and secondary product and markets has been lowered and ensure that risks are sufficiently factored into bid prices.”

Regional Highlights:

Europe: $305bn in 2006 44 % on 2005 (39% in constant currency terms)

Europe became the world’s most active real estate investment market in 2006.  Cross-border investment represented 61 % of total investment (up from 53 % in 2005) and inter-regional investment reached 39 % of total investment (34 % in 2005). There was a distinct shift in the UK’s long term dominance of the European market in 2006 with investment volumes increasing strongly in both Germany and France. 

Total transactions in the UK were US$101bn, 4% below 2005 levels in constant currency terms, however the market still accounted for 33% of European volumes (down from 49%).  Germany was the major global real estate story of 2006.  A combination of willing domestic sellers, aggressive cross-border investors, positive yield spreads and a recovering economy resulted in transactions totalling US$62bn - growth of over 140% in constant currency terms.  The German market now accounts for 20% of European volumes (up from 12%).  The French investment market grew by 70% to $30bn or 10% of European volumes (up from 8%).

North and South America: US$283bn in 2006, up 31 %.
Cross-border investment represented 25 % of total investment (up from 16 % in 2005) and inter-regional investment reached 22 % of total investment (15 % in 2005). Investment markets in the Americas region are overwhelmingly located in the U.S. (96% of the region’s transactions by value, and 40% of global investment).  Other investment markets include Canada and the rapidly growing cross-border markets of Latin America – dominated by Mexico and Brazil.

Asia: $94bn in 2006, up 41 %.
Cross-border investment represented 32 % of total investment (up from 29 % in 2005) and inter-regional investment was 22 % of total investment (18 % in 2005). Asia Pacific markets were dominated by a resurgent Japan where transaction volumes surged 128% to US$52bn – 55% of total investment in the region.  Investors were buoyed by an end to deflation and a slow but steady growth rate in the world’s second largest economy.  Japanese interest rates remain the world’s lowest, providing investors with a healthy yield spread.  Competition for assets remains intense in the market with revitalised domestic investors dominating activity and cross-border investment relegated to 20% of volume.  Global, US and Australian funds are the major cross border investors.  Japanese investors and corporates were the dominant vendors; however a number of Global funds are now selling assets purchased during the recession.